Is Gold About to Go Downhill?

-- By Dr. Melvin Pasternak

With the Olympic games in full swing, most people are obsessed with who's winning gold. And for the past several years, gold itself has been a winning investment. But is that winning streak about to end? Is gold, in fact, a good short?

If so, one easy way to short gold is through an exchange traded fund or ETF. ETFs typically bundle securities into an index, but can be traded like a stock.

SPDR Gold Trust Shares (NYSE: GLD) is the biggest gold ETF of all. GLD has a market cap of $39.8 million and holds $38.54 billion in net assets. Its holdings are physically backed, meaning it holds gold bullion, instead of investing in futures contracts. As a result, GLD closely tracks the price of gold bullion. If bullion drops, there should be a proportionate fall in GLD. The fundamentals and technicals suggest this may be ready to happen.

Here are four fundamental reasons I believe gold could be a good immediate-term short:

The U.S. Dollar is Strengthening: Typically, the U.S. dollar and gold bullion move in opposite directions. When the dollar is weak, gold is strong and vise versa. Gold acts as a hedge against the dollar because investors look for safe havens to protect their assets against weak currency.

Recent negative developments in Europe, Greece in particular, have weighed on U.S. markets. However, the economic instability has boosted the dollar which in turn has pushed gold lower. In fact, the U.S. Dollar Index is at its highest level since June 2009. Technically, the index is in a strong uptrend.

Inflation Will Likely Remain Tame: Gold is a traditional inflation hedge. When inflation increases, gold usually rises. But the Consumer Price Index (CPI) actually fell in January for the first time in more than 27 years. This past week, the Conference Board reported that consumer confidence also dropped 11 points in February -- a sign of weak economic recovery. In this type of environment, businesses do not have the power to raise prices and workers the power to demand and receive higher wages. Despite high budget deficits and large doses of monetary stimulus, inflation is likely to be contained -- at least for the next several months.

The Supply of Gold is Currently High: In September 2009, the International Monetary Fund (IMF) announced the sale of 403.3 tons of its gold to several central banks. It recently put another 191.3 tons up for sale. Although some analysts believed China would likely purchase the IMF's bullion, China announced this past week it would not be buying the gold. With no clear buyer in sight, the IMF's sale puts a large supply of the yellow metal on the market, thereby putting pressure on its price.

The Jewelry Market Has Weakened: Approximately 80% of the total demand for gold comes from the jewelry industry. But the impact of the recession, combined with high gold prices in 2009, led to a -22% drop in demand for gold jewelry. Because consumers cut back on luxury and discretionary items in a recession, gold jewelry purchases fell nearly -8% to 2,000 tons in 2009. India is typically the world's largest consumer of gold jewelry; however, Indian gold imports fell -55% to 126 tons in the first half of 2009. As economic growth slows in China -- one of the biggest gold consuming countries -- some analysts believe the middle classes' demand for gold will correspondingly diminish.

These factors create a weak fundamental outlook for gold, at least in the intermediate term. Longer term, if inflation picks up steam, Trade of the Week subscribers may very well want to buy gold bullion, but that buy point may be later rather than sooner.

Technically, gold remains in a long-term uptrend, above its 30-week moving average. However, there are signs of recent technical weakness.

As the one-year weekly chart shows, GLD started to fall from a high of $119.54 in December, creating a short-term downtrend, and losing nearly -17% in less than three months.

Early this February, GLD broke the short-term downtrend. It has since rallied about +5%, back to its current price at $109.43. The fact that GLD gapped up on February 16th, but then quickly filled that gap is a technical negative.

This week, GLD fell briefly below the 10-week moving average and is approaching closer to the 30-week moving average. A major trendline drawn from the October 2008 low near $70 currently intersects the chart at $104.50. The 30-week moving average is at virtually the same level. If GLD fell below $1045.50, it would break crucial support.

The technical indicators are mixed to negative. MACD is on a sustained sell signal. The MACD histogram remains in negative territory. RSI has been in a downtrend since it became oversold during its December high. It is currently approaching 50, showing that selling pressure has continued. Stochastics has given a buy signal, but not from oversold levels.

I do not want to enter this trade if GLD can hold above its major trendline. However, given gold bullion's weak fundamentals I think this break can happen at any time. I plan to short GLD if it hits $104.40 -- which means it will have fallen below its major trendline and the 30-week moving average.

I will enter the trade through a sell-on-stop order set at $104.40. All major brokerages should accept this kind of order. It means a short position will be entered only if GLD trades at $104.40.

The order is good until Friday, March 26th. My target is $94.50, an important area of historical support. My stop-loss is $110.15, a key area of resistance that could not be broken when GLD gapped up and where the current downtrend line would be broken. The risk reward ratio of the trade is 1.65:1.

(All security prices listed in this newsletter are as of the close of trading on Friday, February 26th.)

Morgan Stanley Municipal Securities (NYSE: IQM) had a positive week, closing up +2.4% from last week. The daily MACD indicator appears as if it's about cross over into the positive, confirming the security's bullish status. My target and stop loss remain unchanged.

Amdocs (NYSE: DOX) inched up slightly this week. It has moved above its 50-day moving average. So far, I am ahead about +3.7% on the position. My target of $33.95 remains.

TowerGroup Inc. (Nasdaq: TWGP) but remains above its 50-day moving average. Prior to the opening of trading on Monday, TWGP will report fourth quarter and fiscal year-end financial results. Analysts estimate fourth-quarter revenue to skyrocket +82% to $245 million. Fourth-quarter earnings are expected to grow by +6%, up to $0.87 per share. My price target of $25.95 holds.

Thanks for reading the latest update on my open trading positions.
 

Melvin Pasternak -- Dr. Melvin Pasternak Co-Editor, Trade of the Week

Note: Mike Turner will return with a new "Trade of the Week" next week.  In the meantime, below you'll find the latest update on his open trading positions...
 

(All security prices listed in this newsletter are as of the close of trading on Friday, February 26.)

With only United States Oil Fund (NYSE: USO) in the open trades list this week, there is not a lot of update information. The forecast data for USO has weakened considerably, as expected. My hope was the forecasted rally would last long enough for us to pick up a quick profit. With the sell-off last Thursday, that is not the case. I do expect a small rally in USO in mid-March, then some choppiness, followed by a big rally in April. Hopefully, we will not stop out before that rally commences.

In the meantime, though, I will not be adjusting my stop loss price. If the trade stops out, I will wait until just before the next expected rally to consider moving back in to the position.

Thanks for reading the latest update on my open trading positions.
 

Mike Turner -- Mike Turner Co-Editor, Trade of the Week

P.S. -- Oil may be one commodity that isn't seeing a lot of upside just yet. But I do know one commodity that could be in for a large appreciation in the coming weeks. Click here to find my three favorite ways to play this limited-time opportunity.